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Sunday, April 26, 2009

Harris+Ewing The eye of the needle 1919Washington Monument from the air

Ilargi: Most of us look forward to violence the same way they do to disease: we hope neither will never hit either us or our close ones. But people do get sick, and people do become actors in violent scenes, all the time. There may be, and perhaps always have been, as many voices proclaiming we will one day be immune to all diseases as there are who dream of a world without violence. Still, history says they’re wrong, and so do all serious looks at the way the human mind functions, and how evolution has shaped it that way. It's reminiscent of how so many still insist we will return to our past times of riches and glory any day now, and surely by Christmas. That will not happen either. Our part of the globe has cured some diseases (though we also created new ones), so we live longer on average, and we've been relatively rich and relatively peaceful for a few decades. But that has never been the norm in the history of our species, merely the exceptions confirming the rules.

When we see that pension systems are in the first stages of collapse all over the western world, while at the same time a chosen few rake in more and more in retirement funds, it's not hard to acknowledge this could be an issue that sparks physical reactions. French workers over the past few months have resorted to "bossnappings", where leaders of the companies they work are locked up in their offices, until their superiors give in to the demands of the workers, which are often no more than for a company to respect severance packages detailed in existing contracts.

Max Keiser has his own view, he thinks people like Hank Paulson should be incarcerated for securities fraud and, alongside Jim Cramer, "swinging from the yardarm". Rulers of governments and industries alike would do well to heed the messages that grow stronger every day, that in the face of deteriorating living conditions people are much less likely to tolerate gross inequality. For now, most of those who may one day pick up their pitchforks are still too occupied watching fake news shows woven around car commercials and reality shows, but the day will come when news shows can no longer ignore reality, not if they want to continue to exist. When the bread runs out, and the circus clowns go home to take care of their families, we’ll once again see what man is really made of.

More than a century and a half after Karl Marx and Friedrich Engels urged the workers of the world to unite, there is still little sign of the proletariat seizing control of the means of production. But since the credit crunch erupted in 2007, plunging two-thirds of countries into recession and costing millions of people their savings and livelihoods, workers of the world have been united in anger. And from the streets of China to the rooftops of north London, from Monaco to South Korea, they are willing to show it - in strikes, protests and sometimes violence. Worker power has been in retreat for over a decade, swept aside by laissez-faire capitalism and rampant economic growth. But today, every country that reaped a share of the benefits of globalisation is feeling the lash of what the Bank of England governor Mervyn King has called "an unprecedented and synchronised downturn ... around the world".

Many of those affected are now venting their fury in public. Across eastern Europe, there have been waves of riots by angry voters who were promised an economic miracle when their countries joined the European Union, but instead have been riding an extraordinary and unsustainable credit bubble that has now burst, leaving many in the clutches of the International Monetary Fund. In Hungary and the Czech Republic, governments have been overthrown by public protests. But it's not just politicians who have aroused the wrath of the people: capitalists - until recently more envied than despised for their riches - are also in the firing line. Attacks on disgraced ex-RBS boss Sir Fred Goodwin's home last month over the size of his pension pot are being echoed in a wave of "bossnappings" and riots across the world, as workers discover that much of the prosperity of the past few years has been illusory.

Europe"The bosses treat us as prats, so we're acting like prats," said Quentin, a worker at a threatened British-owned adhesives plant in Bellegarde-sur-Valserine, during yet another French "bossnapping" incident, which ended after two days this month. Derek Sherwin, head of Scapa Europe, felt the full wrath of his employees - and improved his payoff offer before being set free. Angered by the terms of their redundancies as firms switch production to low-cost countries in the depths of the recession, hundreds of French workers have employed this tactic in at least eight incidents this year. Ten days ago, the Moselle town of Woippy became briefly famous when more than 100 irate workers detained five managers at a plant belonging to Hewlett-Packard subsidiary FM Logistic in protest at the plant's closure. "We've had it up to here," said Bruno, a union spokesman. Traditionally militant France approves of such tactics, according to a recent poll showing 30% in favour and only 7% against, with almost two-thirds expressing some sympathy. And French employers' organisations such as Medef are reluctant to intervene, even though bossnapping carries a potential prison sentence of up to 20 years.

Even the Eiffel Tower has not been immune from the growing wave of protests: it closed for the day earlier this month in a strike over pay. Now France is bracing itself for one of the biggest demonstrations since the war, and certainly since May 1968, on 1 May - Labour Day. In a warm-up, more than 1 million people took to the streets on 31 March. Across the Rhine, Germany is in the throes of, arguably, a worse downturn than France. But, so far, workers and their unions have been remarkably quiescent, in keeping with the years of pay restraint accepted as firms restored their competitive edge after the country entered the euro at too high a rate. But the worm could be turning as up to 2 million are put on short-time working - a possible prelude to losing their jobs - and the country heads for 5 million unemployed or more. On 8 April, hundreds picketed Daimler's annual general meeting in Berlin in protest at pay cuts of up to 14% for 73,000 white-collar staff and shorter hours. Most believe that a reprise of the failed revolutions of 1919, the recession-driven fascist violence of the 1930s, or even the 1968 unrest in Paris, is unlikely. But some are hedging their bets.

United StatesThe giant inflatable rat is a common sight around New York city. The 20-foot blow-up rodent is the symbol of union protest and is usually found in front of a building site or office block where organised labour has been shut out. But the rat is on the move, as protesting has become something of a national pastime in America during the past fortnight, with fist-wavers from the left and the right joining a sort of collective march for rights and justice. The biggest protest marches came on 15 April, the deadline for filing taxes across America. Thousands of Republican and other right-wing protesters, some dressed in colonial wigs adorned with tea bags, rallied all over the country against the Wall Street bailouts and federal financial stimulus packages funded with taxpayers' money.

Their unusual garb was, of course, a reference to the Boston Tea Party in 1773, which sparked the American Revolution, when angry New Englanders dumped boxes of tea into Boston harbour in protest at taxes levied by the British. Elsewhere though, the real victims of the recession were out in force, protesting against job cuts and other more traditional causes. Hundreds of American Airlines ground workers and mechanics rallied on 14 April to protest against bonuses being paid to executives at a time when jobs are being cut. Thousands of local authority workers have been staging strikes too, such as the group in Camden, New Jersey, that blocked roads and bridges to protest against cuts. The police and fire department turned up when the march reached City Hall, but did not break it up. Instead, they joined in.

ChinaAbout 10 million migrant workers have lost their jobs in China as the global economic crisis continues to hit the country hard. Worker protests have been spreading rapidly as the situation worsens, but the government is keen to prevent them escalating into civil unrest. Beijing has dipped into its mountain of savings to undertake one of the biggest fiscal stimulus packages of any country in the world, in a desperate attempt to prevent millions of young people ending up on the scrapheap, but many are still showing their anger at the widespread redundancies. Four hundred workers from a textile factory in Chongqing district blocked roads and disrupted traffic in front of their company headquarters in protests over unpaid wages. Workers at the demonstration complained they had not been paid for more than three months. Jindi, their employer, cannot afford to pay its staff because of falling demands for textiles.

Meanwhile, up to 1,000 workers from a factory in China's northern Hebei province marched in protest over job cuts, corrupt management and inadequate pay. The demonstrators set off on foot and by bicycle towards Beijing to present a petition - a traditional form of protest - but were persuaded by the local government to turn back. In Hunan province this month, hundreds of taxi drivers went on strike over rises in the fees they have to pay each month to taxi companies. Eleven people were arrested after reports of disorder and of violence being used against some strikebreakers and their vehicles. The dire economic situation has led some to take even more drastic action: one worker blew himself up in an office over unpaid wages of £450. Han Wushun had said he was owed the money after working for a road and bridge construction company.

BritainTwenty-six days ago, car parts maker Visteon sacked 560 workers at plants in Enfield, Basildon and Belfast with less than an hour's notice. The company invited staff to come back to the premises next day to pick up their belongings; the staff took them up on that offer and have stayed there ever since. The Enfield and Basildon workers have been forced to picket outside the factory gates after a court order was issued, but the Belfast workers remain on the roof. They say they will not move until they are issued with an adequate redundancy package, and have picketed Ford showrooms, demonstrated outside managers' homes and travelled around the country to rally support. Similar worker occupations have been springing up all over the country as more and more businesses slash jobs. Sacked workers at Prisme Packaging in Dundee have been staging a seven-week sit-in at their former employer's office after they were made redundant without holiday pay, pay in lieu of notice or outstanding wages. Their case is slightly different to Visteon's because the Prisme workers want to reopen the business as a co-operative venture, whereas the Visteon workers want a better payoff.

There was also a seven-week-long occupation at the Waterford Crystal visitor centre in Kilbarry, Ireland, which ended last month after a plan to keep 110 full-time and up to 50 part-time jobs was accepted. Many union leaders believe that if the Visteon occupation is successful, it may encourage others. Keith Flett, chairman of Haringey TUC, says: "I think if the [Visteon workers] actually win, we will see a big spread of this kind of thing." As well as sit-ins, an increasing number of other worker protests have also been taking place. At the end of January, there were wildcat strikes at oil refineries in response to oil company Total bringing in foreign workers amid fears of mass job losses. More protests broke out at the end of March when unemployed construction workers staged a demonstration outside a new E.ON power station on the Isle of Grain in Kent in response to jobs going to workers from overseas.

Even bank workers have jumped on the bandwagon: in February, around 20 of them - brandishing placards bearing the slogan "Remember us? You've put our jobs at risk" - protested outside parliament as the Treasury select committee questioned four former top bankers over their role in the financial crisis. Ciaran Naidoo at trade union Unite says: "There have been a number of protests this year and obviously it's a reference of peoples' growing insecurity and their demands for action from the government." Unite is organising a "March for Jobs" in Birmingham on 16 May, where thousands of workers from an array of companies, including Jaguar Land Rover, are expected to demonstrate. Back at the Prisme Packaging protest, hopes were high at the end of last week: the workers announced they had a tentative deal with an investor, were going into business for themselves, and were therefore ending their occupation. Their statement read: "We said at the beginning of this that we were little people who had refused to be little any more. We are proud of what we have achieved."

If you have followed the coverage of last week's budget you could be forgiven for wondering who will actually end up better off next April, when most of the changes kick in. With little money to play around with, the chancellor was reduced to making his budget more political than ever - which meant, thankfully, that the very wealthy did not fare well at all. Those earning more than £150,000 were hit with a triple whammy of higher income tax, loss of the personal allowance and loss of some tax relief on their pension contributions. But have the less well-off really benefited from this headline-grabbing "robbing" of the rich? The chancellor bowed to pressure from some newspaper campaigns against the assault on older savers, caused by falling interest rates, by increasing the Isa limit for those over 50 from October.

But while any incentive to encourage people to save more is welcome, as I have said before in this column the only people really affected by a drop in savings income are those who have substantial savings already - and are therefore unlikely to struggle to pay their bills. On the other hand, 3.8 million pensioner households have savings of £1,500 or less. Many of these rely on the basic state pension to get by each week. Once again the budget brought little cheer for them. The basic state pension will rise 2.5% from next April and last year's increase in the winter fuel allowance remains for another year. But these moves are not enough to help the poorest pensioners, who have seen the cost of basic living soar over the past two years.

Pensioner inflation is still above 6% and we have just about the lowest state pension in the developed world. A doctor friend of a colleague told her last week that a large proportion of those coming into A&E are pensioners, and that staff have to peel multiple layers of clothing from them before they can treat them. They are trying to keep warm. Low-income families were also given little to celebrate. The child element of the child tax credit will increase by only £20 a year. I spoke to a single dad in his 30s last week, who is earning less than £10,000 and whose only "luxury" is a 10-year-old car that he needs to take his daughter to and from school. For him, the rise in fuel tax will more than wipe out the extra child tax credit. We are in terrible economic times. But thousands have been living their lives as though in a recession for years and, with depressingly little coming from the government in the good times as well as the bad, will continue to live that way when the economy recovers.

Bosses of Britain's biggest companies enjoyed huge increases in the value of their pension pots last year, despite the onset of recession and the downfall of major banks such as Northern Rock, Royal Bank of Scotland and HBOS. The figures will fuel the controversy over the size of directors' pensions and raise concerns about the yawning gap between bosses and the shopfloor. Sixteen company chiefs saw the value of their pensions jump by more than £1m in 2008. When they eventually retire, their final pension payouts could put even Sir Fred Goodwin in the shade. Two directors have already amassed pension funds which will pay them more than £1m a year on retirement. Jeroen van der Veer, chief executive of oil giant Royal Dutch Shell, has accrued a nest egg worth almost £1.2m; Todd Stitzer, boss of the Cadbury confectionery group, could pick up almost £1.5m a year, not counting any further sums they accumulate between now and stepping down.

Goodwin, who was allowed to retire from Royal Bank of Scotland on a full pension at 51, despite overseeing the near collapse of the bank, topped the table for the biggest pension winners among corporate executives last year, with a £8.3m addition to his fund. The government and the bank have been trying to force him to give back some of the £700,000-a-year-for life-pension he is drawing although, so far, without success. The second-biggest top-up went to David Brennan, chief executive of drug giant Astra Zeneca, with a £4m addition - putting him in line for a pension worth more than £600,000 a year. Sir Tom McKillop, former chairman of RBS, attacked for sanctioning the deal for Goodwin, was formerly chief executive of AstraZeneca. He took a £639,000 annual pension when he retired three years ago. Barclays boss John Varley is not far behind Goodwin, having built up a pension worth £572,000 a year for life following a £2.9m top-up last year.

The research into the pensions of chief executives of stockmarket-listed companies was commissioned by the Observer and comes from benefits consultancy MM&K and investor agency Manifest. A few unlucky bosses did see the value of their pension pots fall, including John Rose, chief executive of Rolls Royce and Gareth Davis, head of Imperial Tobacco. But this was due to technical factors and the amount they have squirrelled away is still higher than last year at £449,000 and £626,000 respectively. The big institutional shareholders, who own the bulk of British companies, are becoming increasingly concerned about the size of executive pensions, which are not related to the company's performance. Because of the number of years they are paid they can end up costing companies much more than the executive remuneration during their working lives.

The Association of British Insurers, an umbrella body for investors, has warned companies against giving substantial pay rises in the run-up to retirement, which boosts the value of pensions. Cliff Weight of MM&K, who prepared the survey, said: "In some cases, large pensions undermine the relationship of pay and performance." According to the Pensions Policy Institute, the average occupational pension pays a little over £5,000 a year while the average amount used to buy an annuity under a personal pension is £25,000. By contrast, the average director in the survey's top 10 had a pension pot worth more than £10m, which would translate to a average payment in retirement of £655,000. Ordinary employees are lucky if their employer contributes 10% of their salary to the pension fund every year. But the 10 directors in this survey saw an average of 3.6 times their salary added to their pension pot.

Three of the bosses - Goodwin, John Watson, chief executive of housebuilder Bellway, and Tim Clarke, head of pub group Mitchell & Butler - had more than five times their salary added to their pot. Chancellor Alistair Darling last week slashed tax relief on pension contributions for high earners, cutting the tax relief on contributions for those earning more than £150,000 from 40% to 20%. That sparked outrage among high earners in the City and has led to predictions of an exodus from the UK. One pensions adviser thinks it could also jeopardise ordinary pension scheme members. Alex Waite, head of corporate consulting at Lane Clark & Peacock, said: "If a managing director is not personally able to gain any benefit from participating in the company pension scheme, it is only human nature that their attitude towards the whole scheme will be affected. "Given the delicate state of the UK pension system, it seems rather unfortunate to, in effect, remove the personal value of pension arrangements from those people who are often the decision-makers for everyone else's pension."

Pensions have been one of the great failures of the Blair and Brown administrations. Politicians with a five-year electoral horizon have little incentive to tackle difficult reforms, where the only hope of thanks would come 20 or 30 years hence, when today's voters come to retirement. But when New Labour was elected in 1997, with every expectation of a long stay in power, it had a chance to make positive long-term changes. The reverse has happened, and last week's budget has done nothing to change the largely dismal record.

I had hoped against hope that the leaks of Alistair Darling's plans to reduce higher-rate tax relief on pension contributions were incorrect. Not because I have any great sympathy with those earning more than £150,000 a year, who will see their pensions tax benefit scaled back, but because Darling's ill thought-out move is likely to accelerate the retirement crunch that threatens to take over when the credit crunch eventually leaves off. Darling rightly pointed out that a quarter of all the money this country spends on pensions tax relief goes to the top 1.5% of savers. If he had really wanted to address the issue of fairness, however, he would have taken the much bolder step of restricting all tax relief on pensions to 20%, and recycling the money saved into boosting provision for those on more modest incomes.

Redistribution was not on the agenda. What he has actually done - and it bears all the hallmarks of his master, Gordon Brown - is to impose a contorted measure aimed at scoring electoral points by hitting the rich, though it will not make a jot of difference to the super-sized pension already accrued by Sir Fred Goodwin, who received an £8.3m boost to his pension fund in 2008, even as Royal Bank of Scotland was collapsing. The unintended consequence, as we report below, is that it will sound the final death knell for the traditional company pension scheme. Even before this change, three out of four final salary schemes had closed their doors to new members and one in four of those that remain were saying they intended to pull up their drawbridges. By hurting the executives who make the decisions on whether or not to keep a fund going, the chancellor removed one of the last remaining incentives to do so: self-interest. Thanks, Darling.

The new regime will add further layers of complexity onto an already hideously complicated pensions system, and it is likely to undermine savers' and companies' confidence that there is a stable policy environment for long-term financial planning. Very high earners will be able to engineer some other way of saving tax efficiently; more modest ones will pick up the signal that the government's support for pensions is patchy at best and many will conclude there is no point saving at all. The erosion of final salary pensions cannot be blamed entirely on the government: other factors have played a significant part. These include a decade of poor stockmarket returns, longer life spans, which make it more expensive for companies to support their former employees, and the fact that managements have spent billions - some of which could have gone into pension funds - on activities aimed at boosting the share price, and the bonus pot, such as mergers and acquisitions.

Pensions neglect has left huge deficits looming over corporate Britain, threatening to dampen share valuations and jeopardise recovery. We hear a lot about the profligacy of the past decade but one rarely mentioned debt is that owed by company pension schemes to their members - an obligation too many funds will struggle to meet. But if Labour is not the only, or even the prime, cause of the pension crunch, it has done little to help and a great deal to make it worse. There have been some improvements, such as the Pension Protection Fund, a safety net for people who lose their pension when their employer goes under, yet the government had to be forced to help hundreds of thousands of people who risked losing their retirement income when their schemes were put into wind-up before the PPF came into effect.

Brown's disgraceful and heartless treatment of the Equitable Life victims continues even now, almost a decade after the collapse. After defying the verdict of the Parliamentary Ombudsman that a compensation scheme should be established, he sought to delay and minimise payments by appointing retired judge Sir John Chadwick to prepare a report on discretionary redress; I doubt Chadwick's deadline is pressing. Back in 1997, one of Gordon Brown's first acts as chancellor was to launch a raid on tax credits on pension fund dividends, raising £5bn a year. It was not a move that impinged on most people's consciousness, though they will pay the price in retirement.

Mervyn King is at it too: the Bank of England's quantitative easing (QE) programme is hitting annuity rates and causing pension fund deficits to widen. The combined deficit for companies in the FTSE 350 index has risen to £182bn from £163bn in the first quarter of this year, and QE has played a part in that. What Brown learnt early on was that pensions were a good way of raising money without hiking headline tax rates. The government has abandoned its pledge not to increase the top rate of income tax, but is still raiding voters' pensions, in a way that would have gladdened the heart of that old rogue Robert Maxwell. Shouldn't we wise up?

For five years, Felicia Brown had the luxury of living by herself in a three-bedroom townhouse in Upper Marlboro. On March 20, she was laid off from her job as a grants manager for the AARP's foundation. Suddenly, her $2,000 monthly mortgage seemed foreboding. Unable to find a job right away, the 41-year-old did the only thing she could think of: She asked her parents if she could move back into their Lanham home. This week, renters will move into her townhouse. She has moved her belongings into the bedroom she slept in until graduating from college two decades ago. On her bed is her Cabbage Patch Kid from childhood.

"My mother has cleared out the closet and some of the drawers in the room," she said, "and I'm just going from a home to a room, and I'm going to be happy until this all blows over." The recession, loss of jobs and homes, high cost of living and growing debt are forcing adults to turn back to their parents for financial help. These boomerang kids, as sociologists and psychologists call them, are the latest change in the ever-shifting landscape of the American family. Intergenerational households -- parents, their children and sometimes grandparents -- were common in the 19th century. That changed early in the 20th century, when sons and daughters married younger -- sometimes in their teens -- and quickly moved out to create their own households. Then the Great Depression forced families back together. They once again grew apart during various lush economic periods that followed.

"In some ways, we're coming back and living together the way we did during the Depression," said Amy Goyer, family relationship expert and senior vice president of outreach at Grandparents.com, an online community for grandparents. According to 2008 Census figures, 20 million people ages 18 to 34 live at home with their parents -- 30 percent of that age group. Researchers for the Network on Transitions to Adulthood, a group financed by the John D. and Catherine T. MacArthur Foundation, found that since the 1970s, the number of twentysomethings living with their parents has increased by 50 percent. Of those who moved out of the house by age 22, 16 percent returned home before they hit 35, the researchers found.

Recession will probably accelerate the growth of the phenomenon, as many college graduates find themselves in a market where jobs are not available or don't pay as well as they expected when they took out expensive student loans. Almost half of June 2008's college graduates had planned to move home after graduation, according to a survey by the employment Web site Monster.com. David A. Morrison, president and founder of Twentysomething, a consulting firm that researches young adults, said the last time he noticed this phenomenon was during the recession that hit the country around 2001. But the severity of this economic downturn has forced children of all age groups, single or married, back home, he said. The dynamic is different. Back then, parents with lots of equity in their homes didn't feel as pinched by helping their children. Now, everyone is feeling it.

"It's a much more everyone pulling their weight, because the parents are hurting as well," he said. "The parents are willing to have the kids there, but it's not a free ride." Callie Briese, 27, and her husband, Ryan, 29, are each contributing $100 a month to household expenses while they live with her parents in Northern Bristow. Her parents have not obligated them to do so, but they feel that they should. The couple relocated to Washington from Minneapolis because Callie landed a promotion in her financial services company's office here. Callie arrived in February. Ryan stayed behind to continue his job as a legal aid attorney. He, too, moved in with his parents. He applied for jobs from afar and found nothing. He has been looking since December, when Callie found out about her promotion. Then they discovered she was pregnant. Three weeks ago, Ryan finally moved here -- with no job.

Their plans to buy a house to take advantage of President Obama's first-time homebuyer's tax incentive are on hold for now. "It's hard to make that leap with one income," Callie said. Callie and her mother, Sandy Berg, admit it's been an adjustment. For one thing, Callie is much less tidy than her mother. Callie also has to share a house again with her 20-year-old sister. "I remember bringing home each new baby. As with any family dynamic, everything changes and we had to shuffle and make things work," Berg said. Berg and her husband have not set a deadline for the couple's departure. Callie said they are hoping to be out by summer. "Whether they decide to buy or rent, we want to help them save," Berg said. But financial planners and psychologists said parents should not sacrifice too much for their adult children. Many have seen parents dip into retirement savings to bail out a child. Such an action could end up forcing parents to turn to their children for financial help later in life.

"They may be helping them out in the short-run, but these days parents really have to think long and hard about who's going to be on the hook to help them out if they run out of money," said Tim Mauer, a certified financial planner with Financial Consulate in Hunt Valley, Md. "You're kind of stealing from the future to help pay for the present." Parents should be clear about what they expect. If they lend money, they should specify whether it is a loan or a gift. A loan should come with a contract that spells out terms of repayment. If children move in, there should be a timetable for moving out. They also should decide whether they're going to charge rent or ask that they contribute to household expenses. Not all parents follow those rules. James Brown, Felicia's father, couldn't care less whether his daughter stays two weeks or two years, and he wants no money from her. "We have followed her from being a little thing all the way through to her present life," the retired insurance agent in his 70s said. "We have always been the parents ready to help with whatever the circumstances are."

The world is running out of capital. We cannot take it for granted that the global bond markets will prove deep enough to fund the $6 trillion or so needed for the Obama fiscal package, US-European bank bail-outs, and ballooning deficits almost everywhere. Unless this capital is forthcoming, a clutch of countries will prove unable to roll over their debts at a bearable cost. Those that cannot print money to tide them through, either because they no longer have a national currency (Ireland, Club Med), or because they borrowed abroad (East Europe), run the biggest risk of default. Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long.

Commerzbank said every European bond auction is turning into an "event risk". Britain too finds itself some way down the AAA pecking order as it tries to sell £220bn of Gilts this year to irascible investors, astonished by 5pc deficits into the middle of the next decade. US hedge fund Hayman Advisers is betting on the biggest wave of state bankruptcies and restructurings since 1934. The worst profiles are almost all in Europe – the epicentre of leverage, and denial. As the IMF said last week, Europe's banks have written down 17pc of their losses – American banks have swallowed half. "We have spent a good part of six months combing through the world's sovereign balance sheets to understand how much leverage we are dealing with. The results are shocking," said Hayman's Kyle Bass.

It looked easy for Western governments during the credit bubble, when China, Russia, emerging Asia, and petro-powers were accumulating $1.3 trillion a year in reserves, recycling this wealth back into US Treasuries and agency debt, or European bonds. The tap has been turned off. These countries have become net sellers. Central bank holdings have fallen by $248bn to $6.7 trillion over the last six months. The oil crash has forced both Russia and Venezuela to slash reserves by a third. China let slip last week that it would use more of its $40bn monthly surplus to shore up growth at home and invest in harder assets – perhaps mining companies. The National Institute for Economic and Social Research (NIESR) said last week that since UK debt topped 200pc of GDP after the Second World War, we can comfortably manage the debt-load in this debacle (80pc to 100pc). Variants of this argument are often made for the rest of the OECD club.

But our world is nothing like the late 1940s, when large families were rearing the workforce that would master the debt. Today we face demographic retreat. West and East are both tipping into old-aged atrophy (though the US is in best shape, nota bene). Japan's $1.5 trillion state pension fund – the world's biggest – dropped a bombshell this month. It will start selling holdings of Japanese state bonds this year to cover a $40bn shortfall on its books. So how is the Ministry of Finance going to fund a sovereign debt expected to reach 200pc of GDP by 2010 – also the world's biggest – even assuming that Japan's industry recovers from its 38pc crash? Japan is the first country to face a shrinking workforce in absolute terms, crossing the dreaded line in 2005. Its army of pensioners is dipping into the collective coffers. Japan's savings rate has fallen from 14pc of GDP to 2pc since 1990. Such a fate looms for Germany, Italy, Korea, Eastern Europe, and eventually China as well.

So where is the $6 trillion going to come from this year, and beyond? For now we must fall back on the Fed, the Bank of England, and fellow central banks, relying on QE (printing money) to pay for our schools, roads, and administration. It is necessary, alas, to stave off debt deflation. But it is also a slippery slope, as Fed hawks keep reminding their chairman Ben Bernanke. Threadneedle Street may soon have to double its dose to £150bn, increasing the Gilt load that must eventually be fed back onto the market. The longer this goes on, the bigger the headache later. The Fed is in much the same bind. One wonders if Mr Bernanke regrets saying so blithely that Washington can create unlimited dollars "at essentially no cost". Hayman Advisers says the default threat lies in the cocktail of spiralling public debt and the liabilities of banks – like RBS, Fortis, or Hypo Real – that are landing on sovereign ledger books.

"The crux of the problem is not sub-prime, or Alt-A mortgage loans, or this or that bank. Governments around the world allowed their banking systems to grow unchecked, in some cases growing into an untenable liability for the host country," said Mr Bass. A disturbing number of states look like Iceland once you dig into the entrails, and most are in Europe where liabilities average 4.2 times GDP, compared with 2pc for the US. "There could be a cluster of defaults over the next three years, possibly sooner," he said. Research by former IMF chief economist Ken Rogoff and professor Carmen Reinhart found that spasms of default occur every couple of generations, each time shattering the illusions of bondholders. Half the world succumbed in the 1830s and again in the 1930s.

The G20 deal to triple the IMF's fire-fighting fund to $750bn buys time for the likes of Ukraine and Argentina. But the deeper malaise is that so many of the IMF's backers are themselves exhausting their credit lines and cultural reserves. Great bankruptcies change the world. Spain's defaults under Philip II ruined the Catholic banking dynasties of Italy and south Germany, shifting the locus of financial power to Amsterdam. Anglo-Dutch forces were able to halt the Counter-Reformation, free northern Europe from absolutism, and break into North America. Who knows what revolution may come from this crisis if it ever reaches defaults. My hunch is that it would expose Europe's deep fatigue – brutally so – reducing the Old World to a backwater. Whether US hegemony remains intact is an open question. I would bet on US-China condominium for a quarter century, or just G2 for short.

The rest of the nation may be getting back to basics, but on Wall Street, paychecks still come with a golden promise. Workers at the largest financial institutions are on track to earn as much money this year as they did before the financial crisis began, because of the strong start of the year for bank profits. Even as the industry’s compensation has been put in the spotlight for being so high at a time when many banks have received taxpayer help, six of the biggest banks set aside over $36 billion in the first quarter to pay their employees, according to a review of financial statements. If that pace continues all year, the money set aside for compensation suggests that workers at many banks will see their pay — much of it in bonuses — recover from the lows of last year.

“I just haven’t seen huge changes in the way people are talking about compensation,” said Sandy Gross, managing partner of Pinetum Partners, a financial recruiting firm. “Wall Street is being realistic. You have to retain your human capital.” Brad Hintz, an analyst at Sanford C. Bernstein, was more critical. “Like everything on Wall Street, they’re starting to sin again,” he said. “As you see a recovery, you’ll see everybody’s compensation beginning to rise.” In total, the banks are not necessarily spending more on compensation, because their work forces have shrunk sharply in the last 18 months. Still, the average pay for those who remain — rank-and-file workers whose earnings are not affected by government-imposed limits — appears to be rebounding.

Of the large banks receiving federal help, Goldman Sachs stands out for setting aside the most per person for compensation. The bank, which nearly halved its compensation last year, set aside $4.7 billion for worker pay in the quarter. If that level continues all year, it would add up to average pay of $569,220 per worker — almost as much as the pay in 2007, a record year. “We need to be able to pay our people,” said Lucas van Praag, a spokesman for Goldman, adding that the rest of the year might not prove as profitable, and so the first-quarter reserves might simply be “sensible husbandry.” Indeed, last year, when Goldman lost money in the fourth quarter, it did not pay out some of the compensation it had set aside when earnings were stronger.

At other banks, pay scales tilt in favor of particular units. JPMorgan Chase, for example, is setting aside what would total $138,234 on average for workers. But in the bank’s trading and investment banking unit, if revenue stays at first-quarter levels, workers are on track to earn an average of $509,524 over the year. That figure was $345,147 in 2006. To try to blunt criticism of high pay, some banks have introduced reforms to take back bonuses from individual workers whose bets later lose money. Moreover, executives say that for many well-paid bankers, a good portion of their bonus compensation is in stock, whose value can decline if the performance of the bank lags. Representatives of several of the largest banks said much of their compensation budget covered expenses other than bonuses, like salaries, health care, pension plans and severance.

Still, the compensation expense is the only publicly disclosed figure related to pay at the banks, and it is the best figure for calculating pay per worker. This expense includes money for year-end bonuses. For high earners, bonuses can account for three-quarters of pay. Compensation is among the most cited causes of the financial crisis because bonuses were often tied to short-term gains, even if those gains disappeared later on. Still, as profits return, banks do not appear to be changing the absolute level of worker pay — or the share of revenue dedicated to compensation.

Historically, investment banks have paid workers about 50 cents for every dollar of revenue. The average is lower at commercial banks like JPMorgan Chase and Bank of America, because they employ more people in retail branches where pay is lower. But every dollar paid to workers is a dollar that cannot be used to expand the business or increase lending. Some of that revenue, too, could be used by bailed-out banks to pay back taxpayers. Wall Street, of course, has a long history of high wages. Not all that long ago, most investment banks were private partnerships, and the workers were also typically the owners. Even when those firms began listing their shares on public stock exchanges, a standard was set in which half of their revenue was paid out to workers.

Their argument is that such lofty pay retains the best employees, who help earn more money, ultimately benefiting shareholders. The set-asides in the first quarter for pay can also help raise morale within the banks. Some shareholders, however, contend that the earnings pie should be reapportioned. They argue that shareholders have lost a lot of wealth as bank stocks spiraled, so as revenue picks up, more money should be returned in the form of dividends. “The money should go to shareholders,” said Frederick E. Rowe Jr., a member of the pension board in Texas and the president of Investors for Director Accountability, a nonprofit group. “The fact that the compensation as a percentage of revenue has not gone down is an indication that the root problem has not been addressed.”

Some analysts point to Morgan Stanley as an example of the compensation conundrum. The bank had a dismal quarter, losing $578 million, but still put aside $2.08 billion for compensation. That amount, though lower than the compensation at Goldman, was 68 percent of revenue. Mr. Hintz, the analyst, said the bank could have avoided losing 57 cents a share if it had reserved less revenue for compensation. In an interview, Colm Kelleher, Morgan Stanley’s chief financial officer, said the compensation set-aside was based on the bank’s full-year earnings expectations, not just the first quarter. And Morgan could drop its compensation expense only so low, he said, because much of it consists of fixed expenses, like salaries. “The number of fat cats making loads of money is much less than you think,” he said.

If shareholders do not like compensation policies at banks, they can simply sell their shares. Still, several banks cut bonus pools last year, as losses mounted. And the government is restricting certain pay at banks that received bailout money. The rule, which applies only to the most highly paid workers, has prompted some banks to try to return the government money as fast as possible. Executive recruiters in the sector say prospective recruits are still being offered pay packages on par with those of earlier recruits. Some banks that received taxpayer help are even offering guarantees to recruit workers. Part of the way banks are supporting high pay for their workers is by shrinking their work forces. Citigroup, for example, has dismissed 65,000 people since the start of 2007. That has left Citigroup paying the same amount on average to its remaining workers, though the quarterly cost to Citigroup is down by 25 percent, to $6.4 billion.

The International Monetary Fund is considering a new investment vehicle that some emerging economies are promoting as a way to raise money for the lender to help it combat the global economic crisis. China and Brazil are among a handful of countries that have expressed interest in purchasing IMF-backed bonds which would give member states a different way to contribute to the Washington-based fund. The IMF has never issued bonds. The IMF is seeking more cash to finance loans and aid to member countries during worst economic slump in the fund’s 64- year history. As the institution taps some of its 185 members for additional cash injections, emerging economies say they want more decision-making power at the fund, setting up a possible clash with the rich nations that run it.

“I’m sure that this vehicle will be used,” IMF Managing Director Dominique Strauss-Kahn told reporters today in Washington during meetings of the IMF and World Bank, referring to the bonds. “Now we’re discussing with different creditors the way to implement it and the amount that we put in it.” Bonds would offer “flexibility,” he said, and their interest rate would be pegged to the value of the IMF’s basket of currencies, known as Special Drawing Rights or SDRs. Still, Brazilian Finance Minister Guido Mantega yesterday dismissed the substance of the IMF’s capital-raising bond sale proposal as “insufficient” and “premature.” Brazil would want higher yields than those attached to U.S. Treasuries to buy the new IMF securities, Mantega said after meeting with his counterparts from Russia, India and China at the IMF’s headquarters. He said any contribution by the four largest developing nations would be “provisional,” pending reforms that increase their say in IMF decisions.

Contributions should be directed mainly to help emerging markets weather the global credit crisis, Mantega said, rather than simply “strengthen the current structure of the fund.” Less than a month after the Group of 20 advanced and emerging economies pledged to boost funding for the IMF, some officials say member states aren’t making adequate contributions. Canadian Finance Minister Jim Flaherty today said some G-20 nations aren’t doing their “share” to provide new emergency assistance funding for the IMF. The IMF said it has received $324.5 billion in commitments from G-20 members since mid-March. Leaders of the G-20 agreed to triple the fund’s lending capacity to $750 billion when they met in London on April 2.

The IMF’s policy steering committee today agreed to a $250 billion increase in the fund’s resources through “immediate financing” from members, according to the group’s communique released in Washington. U.S. Treasury Secretary Timothy Geithner said that governments “should act quickly” to boost the fund’s resources. The Obama administration is seeking approval from Congress to contribute up to $100 billion. Geithner said in a statement that he also supports a push to “realign” power at the fund in a way that benefits emerging markets. He also proposed a reduction in the size of the IMF’s executive board next year to 22 from 24 to “better reflect the realities of the global economy.” That number should fall to 20 by 2012, he said. Such a shift must come while maintaining representation for emerging market and developing countries, he said, risking a quarrel with European counterparts who might lose representation as a result.

Strauss-Kahn also told reporters there is broad agreement among IMF members that fiscal stimulus measures in individual countries were necessary, while saying policy makers should devise an “exit strategy” from their emergency moves for when the crisis passes. He also said “everybody agrees” that cleansing banks’ balance sheets is essential to spur a recovery. European officials this weekend questioned IMF estimates that toxic assets plaguing financial institutions would force their banks to write down $750 billion through next year amid global losses forecast to total $4.1 trillion. “With regards to Europe, because of the methodology, in our view we do not have an entirely convincing analysis,” European Central Bank President Jean-Claude Trichet told reporters in Washington late yesterday after a meeting of Group of Seven finance chiefs. French Finance Minister Christine Lagarde said “many among us expressed our greatest reserve on the methodology adopted by the IMF.”

Bank of France Governor Christian Noyer said it was “implicitly” suggested to the IMF to “forget this type of exercise.” At the same time, everyone agrees on the advice the fund gave for the financial system to be “operational” and correctly capitalized again, he said. The IMF said April 21 that its calculations showed banks in the 16-nation euro-area would need to write down more than the U.S.’s $550 billion by the end of 2010. On April 22 the IMF said in a forecast that the global recession will be deeper and the recovery slower than previously thought as financial markets take longer to stabilize. The global economy will shrink 1.3 percent this year compared with a January prediction of 0.5 percent growth, the IMF said. Police arrested seven people in Washington for rioting and assault in the vicinity of the IMF and World Bank meetings, police spokesman Quintin Peterson said. Six people were arrested for destruction of property, including attacks on bank branches of PNC Financial Services Group Inc. and Wachovia Corp., Peterson said. Another person was arrested for assaulting a police officer, he said.

Dominique Strauss-Kahn, the dapper former French finance minister who runs the International Monetary Fund, is finding it hard to conceal a certain swagger in Washington this weekend. If there is one big winner from the wrenching financial crisis of the past year, and the scramble by shell-shocked governments to tackle the turmoil, it is the IMF. At the London summit of G20 countries this month, heads of state signed up to an extraordinary tripling of the IMF's resources, handing it the responsibility of acting as a giant economic shock absorber, to prevent a string of countries falling victim to crises. As one Oxfam campaigner said at the time: "The IMF is big, it's bad and it's back". "I think you can say that the IMF is playing its role - and that is the rationale for the tripling of resources," Strauss-Kahn said this weekend.

Gordon Brown claimed in London that leaders had banished the "Washington consensus" of neo-liberal economics promulgated by the US-dominated IMF and World Bank. Yet the IMF was handed a massive new mandate, and given until 2011 to finish crucial reforms of "quota and voice" - the power each of its member countries have in the IMF's decision-making bodies. Two years ago, the IMF, set up in the aftermath of the second world war, seemed to have lost its mojo. Before the credit crunch, during the calm years that became known as the "great moderation", the IMF's twin jobs, of emergency lender to hard-pressed countries and guardian of the global system, were both in abeyance. And as lending declined, its key source of income, from interest payments, fell away.

The IMF periodically issued warnings about the risks of the "global imbalances" in the international economy - live-now-pay-later consumption in the US and over-sized trade surpluses and vast foreign currency reserves in rapidly expanding emerging countries such as China. But plenty of thinktanks offered their own analyses of the world economy without the need for the IMF's considerable staff and resources, and governments - including Britain's - felt free to disregard its advice. In the past 12 months, as a little local difficulty in the US mortgage markets spiralled into a worldwide recession, and with the global economy now expected to shrink in 2009 for the first time in 60 years, the IMF has been triumphantly reborn. Iceland was the first desperate country to call on it for help - and the first developed country to borrow from it since the UK, in 1976. Several others, including the Ukraine and Latvia, soon joined the club; more, including Turkey, are in fraught negotiations with IMF staff.

Strauss-Kahn arrived at the IMF in the autumn of 2007 determined to rescue it from irrelevance, but it was the credit crunch that really gave it back its job, as what he this weekend called the world's "fire-fighter". Even the most ardent campaigners for reform agree he has made a number of key reforms. "You have to say things are changing faster than they have before - but it's still at a snail's pace," says Peter Chowla, of the Bretton Woods Project, a UK thinktank that monitors the IMF. "A lot of the credit goes to Strauss-Kahn for pushing changes through." Nevertheless, there is profound concern about the IMF's new, beefed-up role, especially among those with long memories. During the Asian crisis of the late 1990s, it imposed stringent conditions on many countries that came to it for help, forcing them to target unrealistically low inflation rates and implement what economists call "pro-cyclical" policies - spending cuts and interest rate rises that can exacerbate a downturn, instead of helping. It used its financial leverage to impose the Washington consensus recipe of financial liberalisation, privatisation and tight budgets; in many cases, the results were catastrophic.

The IMF's own independent evaluation office admitted that, in the case of Indonesia, for example, "the depth of the collapse makes it difficult to argue that things would have been worse without the IMF". The 21st-century IMF would argue it has learned its lessons. Strauss-Kahn stressed this weekend that countries receiving its loans today are not required to sign up to a lengthy list of specific policy conditions. He also published a paper saying that the IMF would give countries additional leeway, to ensure they are not forced to cut back on social spending to meet arbitrary macroeconomic targets. "I have insisted that we're focusing on core conditions, not spending too much time on things that may be good for the country, but have nothing to do with the current situation," he said.

But an analysis of the new wave of loans, by Mark Weisbrot and colleagues from the Washington-based Centre for Economic Policy Research (CEPR), finds that every one contains pro-cyclical policies. While the IMF has led the argument for large-scale fiscal stimulus in the rich world to kick-start economic growth, at the same time, the CEPR argues it is still forcing the countries that come to it for emergency loans to cut back on spending and reduce budget deficits. For example, Pakistan had to promise to cut its deficit from 7.4% of GDP last year to 4.2% this year. "While this might be a desirable goal, it is questionable whether this reduction should all be done this year, when the economy is suffering from a number of external shocks that are reducing private demand," Weisbrot and his co-authors say.

After examining each new crisis loan, they warn that, "the re-establishment of the IMF as a major power in economic and decision making in low- and middle-income countries, with little or no voice for these countries in the IMF's decision-making, could have long-term implications for growth, development, and social indicators in many countries". Duncan Green, head of research at Oxfam, says that whatever the message from HQ in Washington, IMF staff on the ground can't help handing out tough medicine: "It's in their DNA." The IMF's heavy-handed tactics during the Asian crisis arguably played a role in the chain of events that created the credit crunch. It was their determination to avoid being forced into the arms of the IMF again that prompted many Asian countries to pile up huge cushions of foreign currency reserves, deliberately running large trade surpluses.

This "savings glut", as it became known, is one side of the so-called global imbalances that left the world economy dangerously out-of-kilter over recent years. Having all these savings sloshing around encouraged the world's financial system to become increasingly innovative in finding ways of investing it - including in sliced-and-diced sub-prime mortgages and the full range of other toxic assets at the heart of the financial crisis. It is partly this harsh lesson that has prompted one of the IMF's most important innovations - a new lending arrangement called the Flexible Credit Line (FCL), which can effectively act as an overdraft for countries the IMF believes have generally sound policies. In the past, borrowing from the IMF under its traditional "stand-by arrangements" has immediately been interpreted by financial markets - and voters - as a sign of deep distress, but the new facility is meant to remove that stigma. Mexico, Poland and Colombia have already signed up and others are soon expected to follow.

Jim O'Neill, chief economist of Goldman Sachs, says the FCL is aimed partly at providing countries with an insurance policy so that they no longer feel they have to accumulate such large foreign currency reserves at home by keeping their currencies cheap and running giant trade surpluses. "To the extent that the FCL and similar facilities will induce emerging markets to rely less on external demand as the main driver of growth, this should boost consumption and imports in emerging market economies, and help rebalance the global economy," he says. Marita Hutjes, senior policy adviser at Oxfam, agrees that it's a good thing for governments that qualify, reducing the specific conditions they face on loans. But she argues that it still leaves a large number of the poorest economies out in the cold.

"We do think there are serious issues, and countries need access to funds, but it needs to be broader, or something else needs to be available for the poorer countries," she says. "The IMF constantly says financial stimulus is the right thing to do for those countries that can afford it, so it's never for the poorest countries, because there's the assumption that they can't pay for it." Donald Kaberuka, head of the African Development Bank, who was invited to the London summit, told a press conference at the IMF that efforts to protect the poorest countries from the credit crunch have so far been "timid". He warned: "They're either debt-creating, not adequate, or not likely to be effective within the time frame that's needed. We don't see how an international crisis of this magnitude can be resolved by ignoring 900 million people in Africa."

Sir Bob Geldof, who was in Washington this weekend to press a plan for the IMF to devote more resources from proposed sales of its gold reserves to the poorest countries, let loose a furious outburst about the perils of ignoring the plight of Africa in the credit crunch. "All those arguments the activists and the politicians had for many years about aid, or debt cancellation, we can lay them to rest, because we're all begging for aid, we just call it fiscal stimulus. And we're all begging for debt relief, we just call it disposing of toxic assets," he said. In the depths of the worst financial and economic crisis for 60 years, rich countries have so many problems to fix at home - and among their crisis-ridden neighbours, in eastern Europe, for example - there is a risk that many millions of others are still unable to make their voices heard.

Brown had hoped to reach a grand bargain on the future of the Washington financial institutions at the G20 - indeed, in the early planning stages, the London summit was envisaged as a new Bretton Woods, echoing the gathering after the second world war that set up the IMF and the World Bank. Britain was optimistic that emerging economic powers, especially China, with its huge foreign currency reserves, could be persuaded to stump up more cash for development in exchange for more influence in decision-making. What emerged was a giant sticking plaster. There was little new up-front money: much of the trumpeted trebling of IMF resources is still to be found, and the inevitable arguments about influence at the table in Washington were left to another day. China and Russia said they wanted to see a serious examination of the problems caused by the dominance of the dollar - and by implication the US - over the world economy; everyone else quietly ignored them.

In fact, the G20 gave Brown himself the job of coming up with sealing the next stage in the process. He has promised to "consult widely in an inclusive process and report back to the next meeting with proposals for further reforms to improve the responsiveness and adaptability" of the Bank and the IMF. Chowla says the IMF's future will be mapped out over the next 12 months, as developing countries battle for control over its decision making, and a new generation of desperate governments are thrown into its clutches. "It's all to play for," he says. One thing Britain could do to help seal a reform deal is offer to give up its own seat, and some of its voice, at the IMF, along with France, Belgium and others. But the more mischievous among the NGOs say that Brown is just as likely to lay the groundwork for a new posting for himself in Washington should the next general election not go Labour's way.

Strauss-Kahn is clear that he has more plans for radical reform over the next few months. Referring to a recent magazine article that summed up the reforms he has instituted as building "IMF 2.0", he insisted: "We will go further than that: we will have IMF 3.0." It may be many years before it is clear whether Brown is right and the old Washington consensus has been supplanted by a kinder economic system - or if unleashing the mighty power of a reinvigorated IMF is laying the groundwork for Credit Crunch 2.0.

New at the IMF• Three times the resources; at their London Summit at the start of this month, G20 leaders promised to treble the IMF's budget, though some of the cash is still to be found• A dramatic increase in the "special drawing rights" that allow members to borrow from each others' foreign currency reserves, to $250bn• A flexible credit line, for countries with "sound" policies that get into budget difficulties• More leeway for borrower countries to keep up social spending during crises• A doubling of the limit on the total amount each country is allowed to borrow in bailout loans• Fewer specific strings on loans - what the IMF calls "core conditionality"• Better "surveillance" of individual countries' policies and risks to the world system, even when that means "naming and shaming" culprits• Managing directors to be selected by means of a "merit-based" process, although Europe has not actually said it will give up its right of appointment• A promise to reform its out-of-date power structure by spring 2011

The loan arranger: five countries the IMF has helped

Iceland: October 2008 Iceland's over-sized banking sector made the country especially vulnerable to the pressures of the credit crunch. At the IMF's annual meetings in October it emerged that a staff team was sent to Reykjavik to talk to the government about a rescue plan. Iceland received $2.1bn (£1.4bn) - the first developed country to receive an IMF bailout since Britain in 1976. In the run up to agreeing the package, it ratcheted up interest rates to 18% to try and support the krona - a classic piece of pro-cyclical policymaking. However, rates have since begun to come back down.

Hungary: October 2008 The IMF joined with the EU to offer a combined bailout package to Hungary, totalling $25bn, as the plunging forint made its hefty foreign debts impossible to meet. In return, Budapest promised to cut public spending, bring spiralling deficits under control - a policy that economists warned would exacerbate the recession. In March, the government of prime minister Ferenc Gyurcsány collapsed, amid public fury about painful budget cuts.

Pakistan: November 2008 The credit crunch combined with political instability and the rising threat of terrorism left Pakistan's finances in a perilous condition, and the IMF agreed to a $7.6bn loan facility, the second tranche of which was released this month. To secure the support, Islamabad pledged to bring its deficit under control and tackle out-of-control inflation.

Latvia: December 2008 The IMF announced just before Christmas that it would lend $2.4bn to Latvia as the first instalment of a bailout package, but the next tranche has been halted. Riga is refusing to take the IMF's advice and abandon its currency peg to the euro, which the IMF believes is exacerbating the crisis. The fund is insisting on budget cuts to bring the deficit down to less than 5% of GDP. Amid rising social unrest, the government is urging the IMF to allow it to run a larger deficit and warns that it will go bankrupt by June without more help.

Mexico: April 2009 Mexico became the first country to sign up to the IMF's new Flexible Credit Line, an insurance policy which allows countries to draw down funds as and when they need them - up to $47bn in Mexico's case. The IMF says there are no conditions attached to this new instrument, but countries must "pre-qualify," by being judged to have good economic policies. Mexico was joined by Colombia and Poland soon after.

Imminently, Zero Hedge will present some of its recently percolating theories about some oddly convenient coincidences we have witnessed in the commercial real estate market. However, for now I focus on some additional facts about why the unprecedented economic deterioration and the resulting epic drop in commercial real estate values could result in over $1 trillion in upcoming headaches for financial institutions, investors and the administration.

When a month ago I presented some of the projected dynamics of CMBS, a weakness of that analysis was that it did not address the issue in the context of the CRE market's entirety. The fact is that Commercial Mortgage Backed Securities (or securitized conduit financings that gained a lot of favor during the credit bubble peak years for beginners) is at most 25% of the total commercial real estate market, with the bulk of exposure concentrated at banks (50%) and insurance companies' (10%) balance sheets.

But regardless what the source of the original credit exposure, whether securitized or whole loans, the core of the problem is the decline in prices of the underlying properties, in many cases as much as 35-50%. When one considers that with time, the underlying financings became more and more debt prevalent (a good example of the CRE bubble market is the late-2006 purchase of 666 Fifth Avenue by Jared Kushner from TishmanSpeyer for $1.8 billion with no equity down), the largest threat to both the CRE market and the bank's balance sheet is the refinancing contingency, as absent yet another major rent/real estate bubble, the value holes at the time of maturity would have to be plugged with equity from existing borrowers (which, despite what the "stress test" may allege, simply does not exist absent a wholesale banking system nationalization).

The refinancing problem thus boils down to two concurrent themes: The first is the altogether entire current shut down in debt capital markets for assets, which affects all refinancings equally (for the most immediate impact of this issue see General Growth Properties which was not able to obtain any refinancing clemency on the bulk of its properties). The government is addressing this first theme through all the recently adopted programs that are meant to facilitate general credit flow. Readers of Zero Hedge are aware of our skepticism that these are working in any fashion, especially with regards to lower quality assets. The second theme is the much more serious and less easily resolved issue of the negative equity deficiency on a per loan basis, which is not a systemic credit freeze problem, but an underwater investment problem. This analysis focuses on the second theme. The reason for this focus is that there seems to be an unfortunate misunderstanding in the market that lenders will simply agree to roll the maturities on non-qualifying loans, and that the expected percentage of loans that need special lender treatment is low, roughly 5-10% of total loans. In reality the percentage of underwater loans at maturity is likely to be in the 60-70% range, meaning that refi extensions could not possibly occur without the incurrence of major losses for lenders.

In order to demonstrate the seriousness of the problem it is important to first present the magnitude of the refinancing problem. To quote from an earlier post as well as data from Deutsche Bank, and focusing on the CMBS product first, there are approximately $685 billion of commercial mortgages in CMBS maturing between now and 2018, split between $640 billion in fixed-rate and $45 billion in floating rate. The figure below demonstrates the maturity profile by origination vintage. As noted previously, vintages originated in the pre-2005 bubble years are likely much less "threatening" as even with the recent drop in commercial real estate values, the loans are still mostly "in the money".

As Zero Hedge has pointed out previously, the biggest CMBSrefi threat occurs in the 2010-2013 period when 2005-2007 vintaged loans mature. These loans, originated at the top of the market, of which the Kushner loan for 666 Fifth Avenue is a brilliantly vivid example, have experienced 40-50% declines in underlying collateral values, and the majority will have material negative equity at maturity (if they don't in fact default long before their scheduled maturity). Of these loans, only a small percentage will qualify for refinancing at maturity.

At this point cynical readers may say: well even if all CMBS loans are unable to be rolled, it is at most $700 billion in incremental defaults. Is that a big deal - after all that's what the government prints in crisp, brand new, sequentially-numbered dollar bills every 24 hours (give or take). Well, the truth is that CMBS is only the proverbial tip of the $3.4 trillion CRE iceberg. To get a true sense for the problem's magnitude one has to consider the banks and life insurance companies, which have approximately $1.7 trillion and roughly $300 billion in commercial loan exposure.

Banks have $1.1 trillion in core commercial real estate loans on their books according to the FDIC, another $590 billion in construction loans, $205 billion in multifamily loans and $63 billion in farm loans. The precise maturity schedule for these loans is not definitive, however bank loans tend to have short-term durations, and the assumption is that all will mature by 2013, exhibiting moderate increases in maturities due to activity pick up over the last 2-3 years.

Adding the life insurance company estimate of $222 billion in direct loans maturing through 2018 per the Mortgage Bankers Association, increases annual maturities by another $15-25 billion.

In summation as presented below, the total maturities by 2018 are just under $2 trillion, with $1.4 trillion maturing through 2013.

Combining all sources of CRE asset holdings demonstrates the true magnitude of this problem. The period of 2010-2013 will be one of unprecedented stress in the CRE market, and a time in which banks will continue taking massive losses not only on residential mortgage portfolios but also on construction loan portfolios, the last one being a possible powder keg: Foresight Analytics estimates C&L loan losses at a staggering 11.4% in Q4 2008.

And the bad news continues: there is a risk that commercial mortgages will under-perform CMBS loans, and delinquency rates for bank commercial mortgages will be magnitudes higher than those for comparable CMBS. The figure below demonstrates the undperformance of bank commercial mortgages: as of Q4 2008 the delinquency rate for CMBS was less than half of bank CRE exposure.

Reflecting on this data should demonstrate why the administration is in such full-throttle mode to not only reincarnate credit markets at all costs (equity market aberrations be damned) but to boost credit to prior peak levels, explaining the facility in providing taxpayer leverage to private investors who would buy these loans ahead of, and at maturity. Absent an onslaught of new capital, there is simply nowhere that new financing for commercial real estate would come from and the entire banking system would crash once the potential $1 trillion + hole over the next 4 years become apparent, as there is less and less capital left to fill the ever increasing CRE cash black hole.

An attempt to estimate the number of loans that would not conform for refinancing, based on two key criteria of cash flow and collateral presents the conclusion that roughly 68% of the loans maturing in 2009 and thereafter would not qualify. The amount of refinanceable loans is important because borrowers will either be unwilling or unable to put additional equity into these properties. Instead borrowers will be faced with either negotiating maturity extensions from lenders or simply walking away from properties. And despite the banks' and the administration's promise to the contrary, loan extensions will not provide the way out (see below), meaning losses taken against CRE is only a matter of time.

For the purposes of the refi qualification analysis, the criteria that have to be met by an existing loan include a maximum LTV of 70 (higher than current maxima around 60-65), and a 1.3x Debt To Service Coverage Ratio (equivalent to a 10 year fixed rate loan with a 25 year amortization schedule and an 8% mortgage rate).

The simple observation is that nearly 68% of loans in the next 4 years will not qualify for a refinancing at maturity putting the whole plan to merely delay the day of reckoning indefinitely at risk of massive failure.

The underlying premise of maturity extension as a solution to a loan's qualifying problem is that during the extension period the lender is either able to increase the amortization on the loan by some means (i.e. increasing the interest rate and using the extra cash flow to accelerate the loan's pay down), or achieve value growth sufficient to allow the loan to qualify by the end of the extension period. As the equity deficiency for many loans is far too large to be tackled by accelerating the amortization over any period of time, and as for "value growth", with hundreds of billions in distressed mortgage building up over time via these same extensions (even if successful), the likelihood of property price appreciation is laughable: the flood of excess supply of distressed mortgage to hit the market is about to be unleashed.

Then there is the logical aspect: maturity extensions merely delay the resolution and push the problem down the road. And as for CMBS, the issue of extension may be dead on arrival - not only are CMBS special servicers limited to granting at most two to four year maturity extensions, but AAA investors are already mobilizing to stanch any more widespread extensions as a means of dealing with the refi problem.

And, at last, there is the view that the refi problem could fix itself, based on the argument that CRE cash flows are likely to rebound quickly as the economy begins to improve due to pent-up demand. This argument is nonsense: even if cash flows recover to their peak 2007 levels, values would still be down 30% as a result of the shift in financing terms. Ironically, it would require cash flows rebounding far beyond their peak levels to push values up sufficiently to overcome the steep declines. This is equivalent to predicting (as the administration is implicity doing) that the market will be saved by the next rent and real estate bubble, which the U.S. government is currently attempting to generate.

In this light, anything that the government can try to do, absent continuing to print massive amounts of dollars, is irrelevant. The equity market can easily go up indefinitely, short squeezes can be generated at will, TALF can see 10 new, increasingly more meaningless permutations, the administration can prepare worthless stress tests that are neither stressing nor testing, and talk up a storm on cable TV to convince regular investors that all is well, yet none of these will do one thing to provide the banks and CMBS borrowers with the massive capital they will need to plug the value gap either during a CRE loan's term or at maturity. The multi-trillion problem is simply too massive to be manipulated and is also too large to be simply swept under the carpet for the next administration and generation. It is inevitable that the monster hiding in the closet will have to be addressed head on, and the sooner it happens, the less the eventual destruction of individual and societal net worth (however, it still would be massive). Delaying the inevitable at this point is not a viable option: Zero Hedge hopes the administration realizes this, ironically, before it is too late.

Given that CA now has the lowest credit rating of all the states, does that make the high rates CA is offering in recent auctions something to avoid, owing to the risk of default, or something to cherish on the lines of ‘too big to fail’. This is something which came up in conversation today, unsurprisingly, in the wake of my talk to the regional bond dealers. One of them came up to me and indignantly told me that he’d been a muni bond dealer for 38 years, and that of course he knew all about credit risk, as had his forebears before him. To which the natural response is: well, if you’re pricing California debt at these levels, then you must reckon that there’s a pretty substantial probability of default.

The more interesting response was, basically, “my moral hazard trumps your moral hazard”. In other words, it’s true that because California has insured itself against default, there’s moral hazard there: whenever anybody is insured against anything, the likelihood of that thing happening goes up. But at the same time, there’s a bigger moral hazard at play: the federal government will never let California default, it’s too big to fail. And so when push comes to shove, California will get a federal bailout before it defaults on its bondholders. I suspect, however, that the moral hazard seniority works the other way around: the fact that California’s bondholders are insured means that it’s not too big to fail, and that in fact a payment default by the state would have very little in the way of in-state systemic consequences. (I have no idea what it might do to the monolines, but if they can’t cope with a single credit defaulting, they really shouldn’t be in the business they’re in.)

The federal government might step in to mediate the negotiations between the monolines and the state, but it’s not even obvious why it would want to do that. The more powerful argument why California won’t default is that a payment default is illegal under state law: California’s simply not allowed to default on its bonds. But what are the monolines going to do, sue? If California defaults on say a $1 billion payment which the monolines have to pay, then California owes the monolines $1 billion. If the monolines sue the state and win, then California owes the monolines $1 billion. It’s not clear that they’ve advanced very far. Could they start attaching state assets? I doubt it, somehow. My hope is that the monolines would get their money back reasonably quickly — the unintended consequences of a default would force California’s dysfunctional legislature to wake up to the pettiness of its actions, and serious fiscal policies might finally be able to be passed.

But I can’t say that outcome is particularly probable: the California legislature has shown no signs of being grown-up in the past, or even of moving in that direction. And indeed the really nasty unintended consequences of a Californian default might well be felt outside the state, with the closing down of the municipal bond market nationally. Once California defaults, it’s hard to see any other state raising private general-obligation funds at any kind of interest rate it would consider acceptable. Which brings us back to the moral-hazard play: maybe the Feds would bail out California, not for California’s sake, but rather for the sake of the municipal bond markets as a whole. But it’s hard to see where they would get the money, or how Congress would ever approve such an appropriation. Still, Treasury surely has some kind of traction here — maybe it can tell California that it won’t get any stimulus-bill funding if it’s in default on its obligations. Might that do the trick?

The Federal Deposit Insurance Corp has considerable expertise with closing down failed banks but lacks experience in running big nonbank institutions, Comptroller of the Currency John Dugan said on Thursday. "They don't have very much experience in running large institutions, which can be required with a systemically important institution when it gets into trouble," he told a banking conference. Dugan, whose agency regulates some of the biggest U.S. banks like Bank of America Corp and JPMorgan Chase & Co, said the future structure of banking regulation should include the Federal Reserve and a central focus on prudential regulation of banks.

With Congress formulating a plan to create a system risk regulator, Dugan said the Fed is the logical choice because the central bank already does that for banks and its authority should be expanded for other financial institutions. Dugan said he supports reducing the number of banking regulatory agencies but declined to say which agencies should be eliminated. He said the quality of capital at banks needed to be improved by focusing more on tangible common equity (TCE). He said regulators did not get the "impact" they were hoping for by adding capital to banks Tier 1 capital structure. Tangible common equity is a measure of capital strength that has been commanding more investor attention. It looks at how much common equity is supporting a company and ignores intangible assets such as goodwill, on the theory that, in bad times, intangible assets are less likely to have value.

"There's no doubt in my mind that there's been way more focus on tangible capital in the last six months, eight months ... and that's a phenomenon that's happening not just in the United States but internationally," Dugan said. Dugan declined to discuss the government's stress testing of the 19 largest banks except to say "we are getting closer." U.S. regulators want the top banks to have at least 3 percent tangible common equity, according to a source familiar with regulatory discussions. Regulators are in the final stages of the stress tests in which the 19 banks are being tested to see how they would fare should the U.S. recession prove to be deeper and longer than currently expected. An official at the Federal Reserve said last week that some results of the stress tests will be revealed on May 4. Regulators will try to prove the rigor of the tests by releasing a document on Friday that explains the underlying assumptions, the official said.

Wall Street analysts and investors say banks with large portfolios of commercial real-estate loans, especially in recession-battered regions like the Midwest and Southeast, are most likely to find themselves in the crosshairs as a result of the stress tests being finalized by federal regulators. Jeff Davis, director of research at Howe Barnes Hoefer & Arnett Inc., suspects that Regions Financial Corp., of Birmingham, Ala., and Fifth Third Bancorp, of Cincinnati, are among the institutions that will be told they need to raise more capital. Representatives of Regions and Fifth Third each declined to comment.

According to people familiar with the matter, regulators are expected to force several banks to raise additional capital because of their performance on the government's "stress tests," possibly more than three. The exact number and identities couldn't be learned. The government and the 19 banks that submitted to the tests are mum on the results. And while the Federal Reserve released a 19-page "white paper" outlining the tests' methodology, the document didn't shed light on the specific assumptions that drove the government's process. "I don't think I did learn anything that new" from the Fed materials released Friday, said Stuart Plesser, an equities analyst at Standard & Poor's.

Still, analysts, investors and other experts have been crunching their own numbers and say the banks that may be found to be capital-deficient range from national giants to smaller regional banks. Among the industry's titans, J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. are expected to be blessed by examiners. Less certain are the fates of Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. All three banks, which together have received $120 billion in taxpayer capital since last fall, declined to comment on the stress tests. Executives at the banks have said they believe they are adequately capitalized. Some officials have acknowledged that they were waiting for the Fed's test results to come in before exhaling.

David Hendler, an analyst with CreditSights Inc., predicted that the tests may turn up capital deficiencies at Bank of America and Wells Fargo, forcing them to raise common-equity capital by converting existing preferred shares into common stock. Earlier this year, Citigroup announced plans for such a conversion, a move that typically hurts existing shareholders. Spokesmen for Bank of America, Citigroup and Wells Fargo declined to comment on the stress tests. Once the stress-testing of the top 19 banks is wrapped up, analysts expect smaller banks to be subjected to a similar process that will underscore the industry's weak state across the board. "It's just the first round," Mr. Hendler said.

Rescuing the financial system can be profitable, but it's risky. The Federal Reserve said Thursday that it turned over $31.7 billion in earnings to the U.S. Treasury in 2008, down 8% from the year before. The Fed makes its money by lending to banks, holding government securities and -- in recent months -- from loans and securities connected with its rescue efforts. But the Fed's portfolio is no longer mostly super-safe U.S. Treasury debt. In a footnote to the its annual statement, the Fed said, for instance, said that it is holding $26.7 billion in collateralized debt obligations -- bundled packages of debt -- obtained as part of its rescue of American International Group Inc. Roughly a third of the assets was below investment grade as of Dec. 31, 2008.

The Fed also noted that a $1.1 billion portfolio of private mortgage securities obtained as part of its rescue of Bear Stearns & Co. had 51% of its exposure in the troubled California and Florida real estate markets. The Fed's profits were reduced by the sharp decline in interest rates over the year, which was partly - but not entirely - offset by the huge increase in its portfolio. The Fed's total assets grew to $2.246 trillion at year-end 2008 from $915 billion a year earlier. The Fed has booked more than $5 billion in losses on its Bear and AIG holdings, a sum that was only partially offset by income earned from assets in those portfolios.

The managing director of the International Monetary Fund has raised doubts over the validity of Alistair Darling's Budget forecasts this week, declaring that the figures may have been intentionally over-optimistic. In comments which will further undermine the forecasts that underlie last week's Budget, Dominique Strauss-Kahn said that the Chancellor may have decided to claim that the economic recovery would arrive towards the end of this year in an effort to prevent confidence from collapsing further. The reality, he added, may well be different. The Chancellor last week slashed his Budget forecasts for UK economic growth this year from -1pc to -3.5pc, the worst year for the UK economy in post war history. However, only two days after the projections were issued, the Office for National Statistics revealed that the economy shrank by 1.9pc in the first quarter of 2009. Britain's gross domestic product has shrunk at the fastest rate since 1948 in the first six months of the year.

The IMF not only forecasts that the economy will shrink by 4.1pc this year, but also – in spite of Mr Darling's hopes of returning to economic growth before the end of the year – that the UK will contract by 0.4pc next year. Asked about the disparity between his and the UK's forecasts at the conclusion of the IMF meetings on Saturday Mr Strauss-Kahn said: "I would certainly have more pessimistic forecasts than most governments. Last year we were proven right – though it does not mean we are always right. But part of the rebound – the recovery – relies on confidence and it is absolutely normal that governments around the world will try to rebuild confidence by looking at the upper part of the range rather than the lower end. "I understand that most governments have forecasts that are better than ours and I hope that in the end they are proven right."

The comments came at the end of meetings in which the IMF ministers appeared to put a number of roadblocks in front of the ambitious global economic rescue plans mapped out by Gordon Brown in the G20 meeting earlier this month. At the London Summit, Mr Brown and his fellow heads of state pledged to increase the amount of cash the Fund has to help struggling nations by $1.1 trillion (£749bn), through a combination of different sources. However, although the Fund confirmed this weekend it has raised the first chunk of this cash, question marks surround $500bn of this emergency cash, raising doubts about the G20's ultimate chances of success.

The Bank of England is preparing a lifeboat to rescue Britain’s troubled building societies, amid worries for the financial health of the sector. Plans are being drawn up to allow building societies to offer more of their mortgages to the Bank in exchange for cash. The move comes amid crisis talks between the Bank and seven building societies hit by credit-rating downgrades. Savage cuts in interest rates that have pulled Bank rate to only 0.5% are also prompting fears that savers will start to withdraw their money from the societies, creating additional funding strains. There are 52 UK societies, with more than 30m customers. The sector holds more than £200 billion of customer savings and has loaned more than £400 billion, mostly into the over-inflated housing market.

Nationwide, Britain’s biggest society, is larger than all the others combined. Since the credit crunch began it has rescued the Derbyshire, Cheshire and most recently Dunfermline building societies. Other rescue deals have seen Yorkshire take over the Barnsley, and Skipton take over Scarborough. Britannia, the second-biggest society, is merging with the Coop’s financial-services arm. Details of the building-society funding plans will be announced alongside the government’s white paper on the financial-services industry, to be published in the next two to three weeks.

The moves could prompt a slew of cost-cutting measures by building societies through proposals to encourage smaller societies to share back-office facilities such as call centres. Elements of the proposals were buried in last week’s budget documents, where the government promised to “strengthen the mutual sector”. Figures due to be published this week by the Building Societies Association are expected to show that the value of deposits held by the sector has begun to come under pressure since the last interest-rate cut. Although building societies were able to access the Bank of England’s Special Liquidity Scheme, it was only available to those which had launched covered bonds – financial instruments used by societies to parcel up their mortgages and sell them to third-party financial investors.

Moody’s, the credit-ratings agency, has now removed the top-level AAA grading attached to some of these bonds and threatened to remove more in three weeks’ time. Once the rating is removed, the bonds are ineligible for the Bank’s scheme. The new scheme being proposed could see the building societies put up all of their loan books as collateral. The building society talks come ahead of a damning report on the credit crisis due to be published by MPs this week. The Treasury committee is expected to launch a blistering attack on the directors who ran Britain’s failed banks, honing in on their lack of banking qualifications. Sir Fred Goodwin, the former chief executive of Royal Bank of Scotland (RBS), is an accountant. Andy Hornby, the former chief executive of HBOS, had a background in retailing prior to joining the bank.

The non-executive directors of banks are also expected to be criticised for their handling of the crisis. In addition, the report will chart the chain of events from the collapse of Northern Rock through to the bailouts of RBS and Lloyds Banking Group. The government’s response to each stage of the crisis will come under scrutiny from the committee, which is chaired by John McFall, the Labour MP for West Dumbartonshire. It has raised repeated concerns about the relationship between executives running banks and the non-executives who were theoretically controlling them. The report is expected to call for part-time directors to be offered greater support from advisers, in what could be seen as a move towards a German-style system of “supervisory boards” that sit above the executive directors.

Northern Rock is to be sold off by the end of the year under a fast-track government plan to start clawing back some of the hundreds of billions of pounds of taxpayers’ money ploughed into the banking sector. Advisers at Credit Suisse have started to draw up the sale plan, which is linked to moves to split the nationalised bank in two. Potential buyers, including Virgin Money, National Australia Bank and Santander have been sounded out on a possible deal. The private-equity giants Blackstone and Towerbrook are also thought to be examining the opportunity. The move would represent the government’s first exit from its credit-crunch investments, which have also seen it take large stakes in Royal Bank of Scotland and Lloyds Banking Group.

Northern Rock’s most toxic loans are to be siphoned off into a “bad bank” that will remain in government hands. Headhunters have been appointed to find a banker to run the bad-loan book on behalf of UKFI, the body that handles the government’s investments. The bank’s £20 billion of customer savings and network of 70 branches will be put up for sale as soon as the split is complete. Analysts estimate the “good bank” could be worth about £2 billion, roughly £1 billion less than the value of the equity pumped into the bank last summer through a debt-for-equity swap. Northern Rock also owes the Bank of England almost £15 billion for the emergency loans it received to stave off collapse.

In evidence to a judicial review into the bank’s collapse last year, John Kingman, the civil servant who oversaw the nationalisation, revealed the government expected to lose about £1.3 billion on the deal. In spite of the sizeable potential losses on a sale, it is understood that the Treasury is keen to prove to the voting public that there is an exit strategy for the numerous bank bailouts. Barclays is in the early stages of attempting to refinance its £20 billion exposure to bond insurers. The bank, which raised expensive capital from Middle Eastern investors to avoid accepting government cash, has opened talks with a number of large insurers over a possible deal.

Germany said it won’t rule out any potential investor in General Motors Corp.’s Opel unit, responding to a European Union official’s snub over Fiat SpA’s possible interest. “It’s about sustainable concepts,” Stefan Moritz, a spokesman at the Federal Economy Ministry, told reporters in Berlin today. “The question of the qualifications of investors is playing a subordinate role.” EU Industry Commissioner Guenther Verheugen told Bayerischer Rundfunk radio that he’s surprised that a “highly indebted” Fiat would show interest in Opel, saying Fiat “isn’t exactly the European carmaker that’s best off.” Fiat, Italy’s largest carmaker, and Magna International Inc. are the main bidders for a stake in Opel, Hendrik Hering, economy minister of the German state of Rhineland-Palatinate, said yesterday.

Detroit-based GM, surviving on U.S. loans, may file for bankruptcy protection unless it can restructure out of court by June 1. GM said in March that Opel, which is seeking 3.3 billion euros ($4.4 billion) in German state aid, is running out of cash. GM Chief Executive Officer Fritz Henderson said April 17 that Opel has attracted interest from more than half a dozen “serious” investors, without identifying them. The Federal Economy Ministry is “party to talks” with potential investors in Ruesselsheim, Germany-based Opel and is focusing on the “viability of concepts,” Moritz said. He didn’t mention Turin, Italy-based Fiat or Magna, a Canadian car- parts manufacturer.

Verheugen’s comments were “interference in the industrial choices of private parties,” Italian Foreign Minister Franco Frattini said in an e-mailed statement today. In a separate statement, Fiat Chief Executive Officer Sergio Marchionne said Verheugen’s remarks were “not helpful” and “not supportive of the auto industry.” Fiat has until April 30, a deadline imposed by the U.S. government, to reach a partnership accord with Chrysler LLC, which is surviving on $4 billion in U.S. loans and must win concessions from banks and unions to seal a deal with Fiat.

The Italian carmaker’s interest may run up against the opposition of IG Metall, Germany’s biggest union. Armin Schild, a labor representative on Opel’s supervisory board, said in a statement that if Fiat took a stake, it “wouldn’t be a marriage, but an adoption after which Opel would have two sick mothers.” As the two companies have similar product lines, the savings would come at the expense of Opel jobs, he said. Opel, identified by a lightning-bolt trademark, began building cars in 1899 and became part of GM 80 years ago. GM plans to contribute 3 billion euros in assets to bail out the unit, which specializes in small, inexpensive cars and is sold in the U.K. as the Vauxhall brand. Opel aims to lower labor costs by $1.2 billion and is considering closing as many as three plants, a move that unions are fighting.

Kingdom Holding Co., the investment company controlled by Prince Alwaleed bin Talal, reported a 38 percent drop in assets after Citigroup Inc. shares plunged in the credit crisis. Kingdom’s net assets as of March 31 tumbled to 45.2 billion Saudi riyals ($12.1 billion) from 73.4 billion riyals in the year-earlier period, according to a financial statement posted on the Saudi bourse Web site today. Equity assets plunged 81 percent to 6.16 billion riyals from 32.8 billion riyals. Kingdom Holding was hurt by the decline in global stock markets. Citigroup lost 62 percent of its market value in the first quarter as its capital base was eroded by the credit crisis.

Prince Alwaleed is the largest individual investors in New York-based Citigroup. The Riyadh-based investment company reported on April 21 an 83 percent decline in first-quarter net income to 50.2 million riyals. Quarterly dividend income dropped 55% to 126.8 million riyals, compared with 279.5 million riyals in the year-earlier period, according to the company statement. Kingdom didn’t report an impairment loss for the period ended March 31. Kingdom declined 0.9 percent to 5.35 riyals in Riyadh today, giving it a market value of 33.7 billion riyals.

The largest bank in the Central Asian nation of Kazakhstan, whose economy soared when oil prices were high, announced on Friday that it could no longer repay $11 billion in foreign debt. The bank, BTA, said it would pay only interest to foreign creditors, who lavished the country with loans during the commodity boom. The move underscored the growing financial instability in countries all across the former Soviet Union. The financial industry in Kazakhstan grew explosively until credit markets seized up two years ago. Rather than raise money through deposits, banks borrowed excessively from international lenders. Those lines of credit dried up in Kazakhstan quicker than elsewhere, given the risky nature of doing business in the country.

The government has responded with efforts to shore up its finances with new oil deals. This week, Kazakhstan’s national oil company agreed to form a joint venture with a subsidiary of the China National Petroleum Corporation to develop petroleum licenses in Kazakhstan. The country holds about 3 percent of the world’s oil reserves. In the deal, China agreed to provide Kazakhstan with $10 billion in loans. In a statement about the default, BTA said its freeze on the repayment of principal became necessary when some creditors demanded accelerated, or early, repayments. If the bank had met their requests, the statement said, it would have run counter to a stated intention of treating all creditors equally.

The rating agency Fitch immediately downgraded BTA bonds to “restricted default.” BTA bonds traded Friday at 21 cents on the dollar after the announcement, Bloomberg News reported. The decision is likely to ripple throughout the region. Banks in Kazakhstan and Ukraine are seen as especially vulnerable. BTA had been wobbly for some time. The Kazakh government partly nationalized the bank in February. That was taken as a sign that the bank’s debt might be covered by a sovereign guarantee, though even at the time government-appointed executives said they were studying ways to restructure foreign debt. “This was expected in the sense the bonds had already been trading in a deeply distressed fashion,” Adel Kambar, the chief executive of the Kazakh office of Renaissance Capital, said in a telephone interview.

BTA also tried to rescue itself with a sale to Russia’s state-owned retail bank, Sberbank. Those talks were inconclusive. On Friday, Russia’s government news agency RIA Novosti said Sberbank was still interested in buying a large share, but that a purchase would depend on the outcome of debt restructuring talks with Western creditors.

This must be the fourth or fifth picture that Ilargi has posted with “666 Colds, Fever” prominent in it. It has started to drive me crazy as well. So here is some info.

First a blog posting on the Shorpy site:Roberts Remedies No. 666Submitted by Anonymous Tipster on Sun, 04/12/2009 - 9:10pm.I stumbled upon your website while researching a bottle that I found recently. It is an old bottle with a cork stopper and the label (mostly intact) for Roberts Remedies No. 666 from the Monticello Drug Co. It sold for 50 cents. I found the "General Directions" interesting:One teaspoonful in water every three hours until it acts well, then three times a day. As cure for Malaria, One Tablespoonful in water every three hours for three days, then three times a day for eight weeks. CHILDREN IN PROPORTION TO AGE.

Then I discovered that one can still buy this stuff under the same name from Amazon, but it’s just a run of the mill, OTC modern antihistamine.

Examination of samples disclosed that the article contained as medicinalingredients antipyrine (an analgesic drug), ammonium chloride, and Epsomsalt; and that it contained no quinine or other ingredient useful in the treatmentof malaria. The article was colored yellow with a coal-tar dye, in simulation ofa drug of similar appearance and packaging which contained quinine sulfate andwhich was previously marketed by the Monticello Drug Company for the treat-ment of malaria.

So there you have it. The original active ingredient (when they weren’t adulterating the product) during depression time was quinine, which at the time was the only effective treatment for malaria

The next riddle is why and when did endemic malaria disappear from the United States? It was endemic in the USA until the late 1940’s, and according to the CDC was totally eradicated by the use of DDT.

Sobering thoughts, as always, Ilargi. Thanks again for being here, and for doing what you do.

I think Keiser presses the issue most of us are reluctant to face. Are we really just so many inevitable victims out here, isolated and acknowledging the reality of what you write about only as intellectual abstractions until those realities one day hit us in our hungry bellies?

It's so hard to believe it is really going to come to that, yet it seems utterly foolish to expect any other outcome if we just passively allow these people to continue to shape our world for us.

A world is crying out for options. Are there any? It seems that resigned helplessness is exactly what got us where we are now. Are we helpless? Do we have options? These aren't rhetorical questions.

Always feeding fear into the American psyche. 81 Mexicans died, how many Mexicans die every day in hospitals in Mexico? Hundreds, maybe thousands, they are 110 million people. They died because they had to die, probably undernourished, weak or something. A people who eat insects (chapulines, a kind of grasshopper), nopal prickly pear leaves, and maize.

Eight Americans caught a fever, it is is the end of the world! and four Spanish came back from Mexico and are feeling unwell. Oh, oh, buy food and water, and a machine gun and hide in the woods or something, ha, ha. I am more worried that official unemployment in Spain is 4 million and the government says don't mention 5 million, please, it is apocalyptic. So I say it is going to be 6 million by the end of the year, ZP.

I was impressed with Mr. Kaiser as well. I can't imagine what it would take to rile the Americans up. The people I associate with are clueless about what is happening, and ironically seem smug about it. I haven't a clue how this turns out, but from what I read here (Thank you!) it won't be pleasant. Thanks Ilargi and Stoneleigh for your wisdom and time. And thank you to all you posters who are wonderfully intelligent and clever.

What's wrong with this picture. Palms facing upward, citizens are asking what to do in terms of negotiating the economic catastrophe.

I am reminded of that scene in Braveheart when a soon to be devastated William Wallace pulls off the mask of an assumed enemy only to reveal the face of Robert The Bruce. I also am reminded of this line from the movie:

Fantastic blog I & S. Longtime reader and contributor, first time poster. I have learned a lot from your blog. Great place to get all your financial news, especially for those who are squeezed for time.

haven't seen my favorite Canadian Bruce Cockburn featured here yet- there's a video of Call It Democracy posted on You Tube. Probably the only rock song ever written about the IMF! Well, wouldn't be surprised if Billy Bragg took a shot....

As always, thanks a ton-when I get to Croatia I'll send some Kuna your way.

I'm posting a better version of the David Foster Wallace Speech. The previous version carved out many great bits. The speech represents the most profound statement I've read in a long time -- an amazing discourse on genetically ingrained solipsism and the struggle for empathy and community.

Wallace truly tapped into the soulless consumerism of our age, and the struggle to find meaning amidst all apparent prosperity. IMO, the trance of rampant consumerism is a byproduct of societal stagnation -- 30 years of after real economic growth became ecologically impossible to sustain, the perception of prosperity was maintained through a constant stream of illusions (advertising, infotainment, easy credit, and growing debts whose payday was kicked further and further down the road).

The link:David Foster Wallace Commencement SpeechOne of many great sections, but well worth a full reading:"If you worship money and things - if they are where you tap real meaning in life - then you will never have enough. Never feel you have enough. It's the truth. Worship your own body and beauty and sexual allure and you will always feel ugly, and when time and age start showing, you will die a million deaths before they finally plant you. On one level, we all know this stuff already - it's been codified as myths, proverbs, clichés, bromides, epigrams, parables: the skeleton of every great story. The trick is keeping the truth up front in daily consciousness. Worship power - you will feel weak and afraid, and you will need ever more power over others to keep the fear at bay. Worship your intellect, being seen as smart - you will end up feeling stupid, a fraud, always on the verge of being found out.

The insidious thing about these forms of worship is not that they're evil or sinful; it is that they are unconscious. They are default settings. They're the kind of worship you just gradually slip into, day after day, getting more and more selective about what you see and how you measure value without ever being fully aware that that's what you're doing. And the world will not discourage you from operating on your default settings, because the world of men and money and power hums along quite nicely on the fuel of fear and contempt and frustration and craving and the worship of self. Our own present culture has harnessed these forces in ways that have yielded extraordinary wealth and comfort and personal freedom. The freedom to be lords of our own tiny skull-sized kingdoms, alone at the centre of all creation."

The New York Times has an article By JO BECKER and GRETCHEN MORGENSON Published: April 26, 2009 explaining what Timothy F. Geithner, has been doing with your money.This might be good for the front page of TAE.

http://www.nytimes.com/2009/04/27/business/27geithner.html?pagewanted=1&_r=1&partner=rss&emc=rss Member and Overseer of the Finance Club

Ed G, Thanks for the link to DFW's speech there. I have enjoyed Wallace's work on many occasions and was deeply saddened be the news of his death last year. I have a difficult time placing my finger on the elements of his writing that made him seem accessible without ever having met the man, but hearing about his suicide felt like the loss of an associate or aquaintance, not merely a writer.

For anyone who enjoys language and really, really good writing about language, Wallace's essay, "Tense Present", from Harpers in 2001 is the absolute acme of said genre.

Thinking ahead of the curve is what many of us are trying to do now.Max Keiser is no different...hes just willing to spit out the fact that no one in power,or most folks outside of those who live in stone poverty have gotten hungry here for along time.I am not saying that there is not a lot of hungry kids here...but not lots of 3rd world starvation ...yet.[Most poor folks are fat due to their poor diet.] There will be a spark...a trigger...something that makes everyone ask "What side am I on?"thats when we see the spin go on high,and things start to unwind...

I do not know whether or not the propaganda machine that exists here will succeed in allowing two lips and helicopter ben to get out of town with the loot.A lot of people are paying attention about where the boat is headed,now,and starting to hear the roar of the waterfall...don't know if we will make shore...

Its funny.There is probably less than 1500 ass hats who run the show.Anyone with very little resources could Identify,and tag everyone of the the not-so-merry crew that run this entire show,I mean the entire interlocking group of corp heads and ceo ect.The names are in the social directories and sites like "they rule dot net"

Were it time for the revolution.they wont be hard to find...

-...And there is the rub.They rule is one of the places that can show you who really runs the show.They all hang at the same clubs...their kids intermarry...they have a whole social scene,parties,everything that you never hear of...unless you are part of it,read their magazines,hang at their clubs ect....a completely different country within a country.... I suppose it has always been like this..in reality.We Americans like to pretend ours is a classless society,but after 50+years in it I call bullshit.Our class structure is as rigid as the brits 100 years ago,and it is all based on money.Money is your ticket in.

When 20% of the population owns 80% of the goods,and the remaining 20% is split up between 80% of the population...things are so stratified that it is a matter of time before it changes.One way or another. The concentration of wealth has reached a point where 2%of the American population owns nearly 30% of the total goods in the country.Think about that. The conversation I had with Ilargi the other day has gotten me thinking about how this will end.

Not well.....

Why I believe this will end badly is the constant....Human nature.

As those whom own so much in this society seek to continue their "appropriation"of the commons,privatization of everything they possibly can,the result will eventually be the pauperizing of the average man.The same thing has happened elsewhere...and will eventually result in social injustice on a scale that results in change,and usually the butchery of those doing the oppressing. Obama ,if the report of his comment to the banksters was true, understands this.He is supposed to be the one that saves capitalism from itself.Honestly,I think too many of those whom like the system just the way it is will not allow the powerdown needed to keep the social networks intact and our society looking anything like what we have now.Too many in our population making the 200k plus might have taken a haircut on their investments ,but are not willing to face the life changes that powerdown will mean for everyone.They will fight with all their might to retain their privilege...and this will not change whats coming a bit.

Count me among those who believe David Foster Wallace was among our most important cultural critics of the late 20th and early 21st Centuries. One wonders whether the moral and economic decline of our nation was a major contributing factor to the deep clinical depression that led to his tragic and untimely death. He is gone, but he has left behind a body of work for us to read and contemplate.

Note DFW's insistence, in his Kenyon speech, on some kind of religious commitment. Indeed his final unfinished novel seems to have been thematically concerned with mindfulness. Infinite Jest is, among many other things, a rejection of a materialistic conception of the world.

“So yes, we can indeed abuse the U.S. public in order to make the bondholders of U.S. financial institutions whole and protect them from any losses. This was the policy of the Bush Administration, and has tragically become the policy of the Obama Administration as well. By doing so, we will commit our future production to foreign hands, or we will commit about a quarter of U.S. non-financial profits and personal savings to these bondholders over the next decade.

We can also allow bureaucrats to commit public funds that have not even been allocated by Congress, which is what we have done. We have all become dangerously de-sensitized the the sheer volume of money being tossed around here, and the potential for enormous fraud, misappropriation, cronyism, and misuse.

What we cannot do is create all of this out of thin air. Understand that the money that the government is throwing around represents a transfer of wealth from an unwitting public to the bondholders of mismanaged financial corporations, even while foreclosures continue. Even if the Fed buys up the Treasuries being issued, and thereby “monetizes” the debt, that increase in government liabilities will mean a long-term erosion in the purchasing power of people on relatively fixed incomes.

To a large extent, the funds to defend these bondholders will come by allowing U.S. businesses and our future production to be controlled by foreigners. You'll watch the analysts on the financial news channels celebrate the acquisition of U.S. businesses by foreign buyers as if it represents something good. It's frustrating, but we are wasting trillions of dollars that could bring enormous relief of suffering, knowledge, productivity, and innovation in order to defend bondholders of mismanaged financials, and nobody cares because hey, at least the stock market is rallying. If one thing is clear from the last decade, it is that investors have no concern about the ultimate cost of the wreckage as long as they can keep a bubble going over the short run.

For my part, I remain convinced that without serious efforts at foreclosure abatement (ideally via property appreciation rights), mortgage losses will begin to creep higher later this year, surging in mid-2010, remaining high through 2011, and peaking in early 2012. To believe that we are through with this crisis or the associated losses is to completely ignore the overhang of mortgage resets that still remain from the final years of the housing bubble.”Money Doesn't Grow On Trees Weekly Market Comment, John P. Hussman

Another tool for tracking the tangled web they weave is:http://www.muckety.com

You need Flash on your browser and it's interactive, you can double click on any connection in the web to see the expanded relations. You can also grab and move the players around for clarity sake when it gets too visually complicated, so you can zero in on just part of the relationship you are interested in.

@Bigelow- "By doing so, we will commit our future production to foreign hands, or we will commit about a quarter of U.S. non-financial profits and personal savings to these bondholders over the next decade."

The national debt will never be repaid. Never. The logic behind repudiation is no different than that used to justify the rejection of (war) reparations:

Future generations simply will not accept responsibility in any way, shape or form for the actions taken by rogue governments taken on behalf of their own vested interests **during their time in power**.

Add in changing ethnic and aging demographics, and it soon becomes obvious that young Hispanic families (the new majority) will not be working & paying taxes in order to support the retirement and medical needs of older, white Americans.

So, I say, borrow and print away - it's all just so many bits on an electronic scoreboard that can (and will) be easily destroyed.

The last propaganda 'diversion' the financial mobsters will pull is a war.

It's the only thing large enough to misdirect the herd's rage at the end game they will find themselves in; total impoverishment and debt slavery.

Historically, Banksters got their real start in criminal compound interest loan sharking in the 15th century in Europe, fomenting wars.

Business was very good.

It's the obvious choice. They've done it before with impunity, Gulf of Tonkin, WMD etc...no big deal for them.

Robbing a bank? Set the town hall and the local mall on fire as a diversion.

A very old ploy.

When the Germans repudiated their unpayable 'war reparations', it was the checkered flag to start the World War - version 2.0.

It was an obvious move, not a subtle, nuanced action.

Losers only option is to physically attack their creditors in hopes of 'erasing their obligations' with a knockout punch.

For the U.S., that would be China.

Unfortunately, judging from China tests to knockout satellites and their surfacing of attack subs undetected in the middle of a major US Pacific war fleet games, I'd put my wager on their technical skills to put up great resistance, if not an offensive against the US itself.

An assumption contained in Hussman's statement is that the US will last 10 more years. IMO one of the last things to go would be tax collections on the poor funneled to debt service and war. I'm supposing Social Security and Medicare etc will be gone because banksters and war are more important than people (brown or other colors).

“One salient ponder is this note about the economic differences between the 1918 flu and what's going on now...

"Finance: there were no credit cards or personal checking accounts, which meant far more frequent visits to the bank. In 1918, there was almost exclusively a cash economy. Closure of banks might be explained as a response to a pandemic, but it could have been perceived that the closure meant the bank did not have funds."

I have to suspiciously wonder if the PowersThatBe might have a little something up their sleeve with regard to how money is managed in the world: Could a flu pandemic be used as an excuse to rid the world of "dirty money" (e.g. cash) and set us all in a grand central computer system where infinitely expandable digidollars could be inflated forever?” --Sick People = Sick Markets, UrbanSurvival.com

Snuffy, you wrote "...and will eventually result in social injustice on a scale that results in change,and usually the butchery of those doing the oppressing."

I think this is a possibility. I also think that butchery of the oppressed is also a distinct possibility. We could go back and forth and cite historical examples or examples from contemporaneous places with even grosser inequality than in the western world now. We could argue that it will be the masses that over-throw the oppressors or vice versa that the oppressors will rule the day in the coming decade. There is no way to know. I too expect things to get worse - more violence, more poverty, more disease - but so far I have next to no confidence in my predictions for how the political crisis Ilargi so often draws our attention to will actually play out.

I think it all depends on the rates of change. Have you read 'Of Frogs Men and Men' by I. Emma Toade? A story fraught with mystery and suspense as dark wind in the willows blow warmer and warmer as temperatures in the pond slowly rise.

I know of historical precedence for it coming out each way also...As has been mentioned many times..."In the long run we are all dead"... How this shakes out in the next 30 years is my primary concern...I had hoped for a quiet retirement to a garden and a sailboat...That does not seem to be how things are going to work out however.I sense a growing,expanding fracturing of "the good life" now lived by most Americans. Oldsters working as walmart greeters for food enough to survive...pensions begining to hit the wall now.. I have a brother who has retired after 25 years as a police officer @a cool 5 k /month forever[or so he thinks].Every time I have ever raised the posibility that he could be screwed out of it he laughes at me.His wife is a bank executive and they have always live "well"at the 200k+ level...His is a "soon coming" "education"I don't want to be around when it happens. His main source of news is fox,and has repeated the Rep.party line so long he believes it.When their "education"happens I dont think they will take it well.They believe they are part of the ones who will not be affected by any lumps and bumps..... Ilargi,how long can they paper over the pension stuff?is there any way to see which ones are exposed?